By Gita Gopinath
In just three months since we released our last forecast in October, recorded COVID-19 deaths have doubled to over 2 million, as new waves have lifted infections past previous peaks in many countries. In these same three months, multiple vaccines have seen unexpectedly strong success and some countries have started ambitious vaccination drives.
Much now depends on the outcome of this race between a mutating virus and vaccines to end the pandemic, and on the ability of policies to provide effective support until that happens. There remains tremendous uncertainty and prospects vary greatly across countries.
In our (the International Monetary Fund’s) latest World Economic Outlook forecast, we project global growth for 2021 at 5.5 percent, 0.3 percentage point higher than our October forecast, moderating to 4.2 percent in 2022. The upgrade for 2021 reflects the positive effects of the onset of vaccinations in some countries, additional policy support at the end of 2020 in economies such as the United States and Japan, and an expected increase in contact-intensive activities as the health crisis wanes.
Not too bright outlook for the near future
However, the positive effects are partially offset by a somewhat worse outlook for the very near term as measures to contain the spread of the novel coronavirus dampen activity.
There is a great deal of uncertainty around this forecast. Greater success with vaccinations and therapeutics and additional policy support could improve outcomes, while slow vaccine rollout, virus mutations, and premature withdrawal of policy support can worsen outcomes. If downside risks were to materialize, a tightening of financial conditions could amplify the downturn at a time when public and corporate debts are at record highs worldwide.
The projected recovery in growth this year follows a severe collapse in 2020. Even though the estimated collapse (-3.5 percent) is somewhat less dire than we had previously projected (-4.4 percent) owing to stronger-than-expected growth in the second half of last year, it remains the worst peacetime global contraction since the Great Depression.
Because of the partial nature of the rebound, over 150 economies are expected to have per capita incomes below their 2019 levels in 2021. That number declines only modestly to around 110 economies in 2022. At $22 trillion, the projected cumulative output loss over 2020-25 relative to the pre-pandemic projected levels remains substantial.
Great divergence within and across countries
The strength of the projected recovery also varies significantly across countries, with large differences in projected output losses relative to the pre-COVID-19 forecast. China returned to its pre-pandemic projected level in the fourth quarter of 2020, ahead of other large economies. The US is projected to surpass its pre-COVID-19 levels this year, well ahead of the eurozone.
With advanced economies generally expected to recover faster, progress made toward convergence over the last decade is at risk of reversing. Over 50 percent of emerging markets and developing economies that were converging toward advanced economies per capita income over the last decade are expected to diverge over the 2020-22 period.
The faster recoveries in advanced economies are partly due to their more expansive policy support and quicker access to vaccines relative to many developing countries. Oil exporters and tourism-based economies face particularly difficult prospects given the subdued outlook for oil prices and expected slow normalization of cross-border travel.
Even within countries, the burden of the crisis has fallen unevenly across groups and has increased inequality. Workers with less education, youths, women and those informally employed have suffered disproportionate income losses. Close to 90 million individuals are expected to enter extreme poverty over the 2020-21 period, reversing the trends of the past two decades.
If vaccines and therapies remain effective against new virus strains, we may be able to exit this crisis with less scarring than was feared and arrest the divergence in prospects across and within countries. However, that will require much more on the policy front.
First, the international community must act swiftly to ensure rapid and broad global access to vaccinations and therapeutics, in order to correct the deep inequity in access that currently exists. This will require ramping up production and bolstering funding for the COVAX facility and for the logistics of vaccine delivery to poorer nations.
The health and economic arguments for this are overwhelming. The new virus strains are a reminder that the pandemic is not over until it is over everywhere, and we estimate that faster progress on ending the health crisis will raise global income cumulatively by $9 trillion over the 2020-25 period, with benefits for all countries, including around $4 trillion for advanced economies.
Second, targeted economic lifelines to households and firms should be maintained where the virus is surging to help maintain livelihoods and prevent bankruptcies of otherwise viable firms, enabling a faster rebound once constraints are lifted. In countries where fiscal space is limited, spending should be prioritized for health and transfers to the poor. Once infections are durably declining with broadening immunity to the virus, lifelines can be gradually rolled back by making their parameters less generous over time to incentivize labor mobility and reduce the risk of zombie firms that can impair productivity.
Freed-up resources can be used to support recovery
If policy space permits, resources freed up can be reallocated to support the recovery. Priority areas include education spending to remedy the setback to human capital accumulation, digitalization to boost productivity growth, and green investment to create jobs and accelerate the transition to a new climate economy. A synchronized green public investment push by the largest economies with fiscal space to do so can enhance the effectiveness of individual actions and boost cross-border spillovers through trade linkages.
–The Daily Mail-China Daily News Exchange Item
